Resource revolution needs more than just price signals

I am simultaneously impressed and disappointed with the Resource Revolution report published this week by economic experts McKinsey Global Institute.

What is impressive about the report into pressure on global resources, is their detailed analysis of the scale of challenge over the next 20 years in meeting the world's energy, material, food and water needs, as well as the recognition that global environmental degradation must be addressed for the sake of human well-being and healthy economies.

What I found disappointing, but perhaps not surprising, is the overemphasis on price signals in meeting these challenges.

The challenges they identify are not new, for example:

• Three billion more middle-class consumers by 2030 will put huge strains on resources (they rightly identify this as a greater challenge than total population numbers, while acknowledging population growth as an issue).
• At least $1 trillion a year extra investment needed in things like resource efficiency, low-carbon energy supply and exploiting new resources.
• While resources were cheap in the 20^th century, prices will be high and volatile in the 21^st century.

Reasons to be cheerful

McKinsey economists point to some reasons for optimism. For example, they suggest that solar power costs are likely to continue tumbling, with prices falling from $8 per watt in 2007 to $1 per watt in 2020.

And they suggest just 15 areas that together can deliver three-quarters of the gains in resource efficiency needed, such as the boosting buildings' energy efficiency, increasing  urban densification and more electric cars.

If the price is right?

But the reports' main policy emphasis is that pricing resources - such as through trading or taxes - will largely drive the necessary change. Coming from an economics consultancy, this conclusion is not that surprising. But I suggest this over-emphasis on price is not justified by their own research.

McKinsey researchers have consistently demonstrated that individuals and businesses could take many actions that have a negative cost (i.e. would save money) but are not doing so.

This is glaringly obvious in terms of buildings' energy efficiency, an area McKinsey identify as by far the biggest potential contributor to resource savings. Experience here shows the blockage to action is not so much price signals but rather the numerous other barriers to action, such as access to capital to retrofit and the hassle factor. Friends of the Earth believes that grants, subsidies and regulation are critical policy tools in this and many other areas.

In addition, McKinsey should recognise that although price signals can be a valuable policy tool, used badly they can be regressive and increase inequalities. Growing inequalities are something the McKinsey authors nervously suggest may need addressing. I wonder if the authors were a bit worried about the response from their super-rich bosses and clients.

Overall, Resource Revolution is well worth a read. And no doubt economists and businesses that don't normally read state-of-the-world reports will do so.

But I believe it would have been a better report if, instead of overemphasising the role of pricing signals, it had identified that we need a policy mix also including regulation, grants and subsidies to really meet global resource needs.